While top bankers are “a little disappointed” and “surprised” with the Reserve Bank of India’s decision to keep the Repo rate unchanged at 6.25 per cent, they said lending and deposit rates are likely to fall further in view of the better liquidity in the system after the removal of the 100 per cent incremental cash reserve ratio (CRR).
“I think the rate cut may not have meant anything really materially immediately, in the sense that banks are not really dependent too much on market borrowings, other than the fall in yields, but it would definitely have had a very good impact on the sentiment. So to that extent, I think the market is little disappointed,” State Bank of India chairman Arundhati Bhattacharya told the business channel CNBCTV18.
She said in the near past, there has been massive demand destruction and it is important at this point to get demand back up and for that the economy does need to climb up.
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Chanda Kochhar, MD and CEO, ICICI Bank, said, “Deposit and lending rates are expected to continue to show a downward trend going forward. The RBI has maintained stability in monetary policy with a focus on the medium-term inflation targets being sustainably achieved, while continuing to be supportive of growth. The policy has maintained an accommodative stance while taking into account global developments and domestic economic conditions.”
“With respect to demonetisation, the assessment that this will have only a transient impact on growth is welcome. With regard to liquidity and interest rates, the withdrawal of the incremental CRR requirement and the use of other instruments such as the Market Stabilisation Scheme to manage liquidity is welcome,” Kochhar said.
MD & CEO of Bank of India, Melwyn Rego, said, “The decision to keep policy rates unchanged took the markets by surprise as a 25 bps cut was the consensus view. Risk to inflation trajectory was the major reason for a pause since base effect for CPI would be unfavourable from December onwards. The tone of the policy is a bit hawkish.”
According to Rana Kapoor, MD & CEO of YES Bank, the policy is a reflection of the RBI’s confidence and conviction that the impact of demonetisation on growth is transitory, and the mid-long terms benefits are positive for the economy. “Further, the rollback of incremental CRR hike augurs well for the banking sector as a whole. Post the outcome of the US Fed meeting, and stabilisation of the demonetisation initiative, in my opinion there will be room to deliver a 50-75 bps cut the Repo rate, in the next post-Budget meeting in February 2017 term, and surely by April 2017,” Kapoor said. “The RBI decision to withdraw CRR on incremental deposits is a welcome move. MSS bonds worth Rs.6 Lakh Crore would ensure orderly liquidity management and is in line with liquidity neutral stance. Bond market, obviously, reacted negatively post policy with the benchmark 10 year paper rising 15-20 bps. However, inadequate deployment avenues would lead to range bound movement in yields. Overall, the policy had a cautious tone highlighting inflation risks due to unfavorable base effect and rise in crude and commodity prices,” Rego said.
Kotak Mahindra Bank’s Shanti Ekambaram attributed the surprise from the MPC to the “uncertain global and local factors, and the RBI will now wait and watch for more trends and data.” Bandhan Bank chairman Chandra Shekhar Ghosh said, “Many of us were expecting a quarter percentage point reduction in RBI’s key policy rate. However, it has adopted a wait and watch approach to see how the inflation trajectory pans out in the coming months.”